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Imperfect Asset Substitutability and Monetary Policy under Fixed Exchange Rates

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Author Info
Maurice Obstfeld

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Abstract

This paper presents a long-run model of the open economy in a world of fixed exchange rates and imperfect substitutability between bonds denominated in different currencies. The model explicitly accounts for the wealth flow accompanying current-account imbalance and for the flow of interest payments associated with international lending. Both the dynamic and steady-state implications of the model are quite different from those of models that specify the capital account as a continuing flow responding to the level of interest rates. In particular, we find that when there exists outside government debt, open-market policy is not in general neutral in the long run. We also find conditions under which the central bank is able to hold the domestic price level constant in the face of an inflationary disturbance from abroad without exhausting, in the long run, its stock of domestic assets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0485.

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Date of creation: Dec 1980
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Handle: RePEc:nbr:nberwo:0485

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Levin, Jay H, 1972. "International Capital Mobility and the Assignment Problem," Oxford Economic Papers, Oxford University Press, vol. 24(1), pages 54-67, March. [Downloadable!] (restricted)
  2. Robert P. Flood, 1977. "Growth, Prices, and the Balance of Payments," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 193-207, May. [Downloadable!] (restricted)
  3. Obstfeld, Maurice, 1982. "The capitalization of income streams and the effects of open-market policy under fixed exchange rates," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 87-98. [Downloadable!] (restricted)
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  4. Henderson, Dale W, 1977. "Modeling the Interdependence of National Money and Capital Markets," American Economic Review, American Economic Association, vol. 67(1), pages 190-99, February. [Downloadable!] (restricted)
  5. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec.. [Downloadable!] (restricted)
  6. Fratianni, Michele, 1976. "On the effectiveness of monetary policy under fixed rates of exchange," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 63-79, January. [Downloadable!] (restricted)
  7. Johnson, Harry G, 1974. "Major Issues in Monetary Economics," Oxford Economic Papers, Oxford University Press, vol. 26(2), pages 212-25, July. [Downloadable!] (restricted)
  8. Tsiang, S C, 1975. "The Dynamics of International Capital Flows and Internal and External Balance," The Quarterly Journal of Economics, MIT Press, vol. 89(2), pages 195-214, May. [Downloadable!] (restricted)
  9. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-67, May/June. [Downloadable!] (restricted)
  10. Willet, Thomas D & Forte, Francesco, 1969. "Interest Rate Policy and External Balance," The Quarterly Journal of Economics, MIT Press, vol. 83(2), pages 242-62, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Maurice Obstfeld, 1983. "Exchange Rates, Inflation and the Sterilization Problem: Germany, 1975-1981," NBER Working Papers 0963, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Martin Feldstein, 1982. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Working Papers 0947, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Maurice Obstfeld, 1993. "The Adjustment Mechanism," NBER Working Papers 3943, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Sung Yeung Kwack, 2001. "An Empirical Assessment Of Monetary Policy Responses To Capital Inflows In Asia Before The Financial Crisis," International Economic Journal, Korean International Economic Association, vol. 15(1), pages 95-113, April. [Downloadable!] (restricted)
  5. Maurice Obstfeld, 1982. "The Capitalization of Income Streams and the Effects of Open Market Policy under Fixed Exchange Rates," NBER Working Papers 0528, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Pekka Ahtiala, 1981. "Economic Policy in an Open Macro Model with Rational Labor Behavior," Discussion Papers 487, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  7. Jeffrey D. Sachs, 1982. "Aspects of the Current Account Behavior of OECD Economies," NBER Working Papers 0859, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. William H. Branson & Willem H. Buiter, 1983. "Monetary and Fiscal Policy with Flexible Exchange Rates," NBER Working Papers 0901, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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